Authored by: Prof Geric L. Baliao CIA, MBA.

An Academic Volume
in the expertise of

Monetary Policy and Central Banking.

Written and prepared by

Prof. Geric L. Baliao, CIA, MBA

PREFACE
Armed with the vision of becoming God's humble instrument in making students' ambitions a truism, I began
writing this monograph in July 2023 for the student's expertise in Monetary Policy and Central Banking. I have not
wavered in my efforts to reach out and assist as many students and researchers as possible by providing them with
appropriate materials.

With the help of Divine Providence and valued clients, I can now modestly assert that this text book is the ''Top of
Mind'' book for the academic subject of Monetary Policy and Central Banking. Researchers and readers of this book
will notice my clearly outlined and relevant discussions delivered in a comprehensible language right away.

This academic volume on Monetary Policy and Central Banking is my humble contribution to the introduction of
Monetary Policy and Central Banking into the curriculum of college students, particularly those studying Business
Administration. This book is regarded as one of the best modules in the business finance class for using the
''Learning to Learn'' approach.

By prescribing this book, the academic mentors, or the so called ‘’Unheralded Heroes’’ have bestowed their
unwavering trust and utmost confidence on this book. Thus, the student need to not spend for another book as
reference for this subject because everything he ought to know about the subject of Monetary Policy and Central
Banking is here. The students are patiently guided through the Business Finance learnings in a rational, concise,
and comprehensive manner. Students will unquestionably be proficient in the fundamentals of Monetary Policy for
all college students in Business Course with the acumen and able facilitation of academians, as well as this book's
key to learning the essentials.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

TABLE OF CONTENTS
Chapter One • Types of Monetary Policy
Introduction to Monetary Policy - Contractionary
- Expansionary
• Tools of Monetary Policy
- Open Market Operations
- Interest Rates
- Reserve Requirements
• Goals of Monetary Policy
- Inflation
- Unemployment
- Exchange Rates
• Monetary Policy vs Fiscal Policy
Chapter Two • What is a Financial System
Introduction to The Philippine • Financial Structure and
Financial System Monetary Policy in the
Philippines
• Recent Trends in Philippine
Financial System.
Chapter Three
• KEY ELEMENTS OF THE FINANCIAL
The Philippine Financial System and
SYSTEM
the Central Bank of the Philippines • Key Functions of Financial Management
• History of Central Banking and Bangko
Sentral ng Pilipinas (BSP)

• ABOUT THE BANK

- Mandate, Functions and

Responsibilities
- Vission, Mission and Core Values
- Organization and Governance

Chapter Four • FINANCIAL CLAIMS

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

The Financial Claims

• MONEY AND ITS FUNCTION
- Money as the Medium of
Exchange
- Money as a Unit of Account
or Measure of Value
- Money as the Standard of
Deferred Payments
- Money as a Store of Value
• WHAT IS INTEREST RATE?
• TYPES OF INTEREST RATE
- Nominal Interest Rates
- Real Interest Rates
Chapter Five • What is a Financial Institution?
The Financial Institutions • Types of Financial Institutions
- Banks, Credit Unions and Savings &
Loans
- Investment Companies, Advisors,
and Brokers
- Insurance Companies
• Why are Financial Institutions
Important?
• Financial Institution vs Financial
Intermediaries.
Chapter Six • Key functions of a Financial
The Financial Institutions Part II Institution
- Financial Liquidity
- Financial Intermediation
- Maximation of Profit
- Financial Risk Management
• Non-Banking Institution
• Types of Non-Banking
Institution
Chapter Seven

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Chapter One: Introduction to Monetary Policy

Learning Objectives:

After studying this chapter, students should be able to:

1. Define monetary policy and explain its purpose in a state.

2. Explain the functions and key take aways of the topic of monetary policy.
3. Outline the types, goals, and tools of monetary policy, as well as the embedded relationship
between the major topics in the subject.
4. Compare and contrast the differences between Monetary Policy and Fiscal Policy.
5. Raise awareness of the role of Monetary Policy in a nation's financial and economic growth and
success.

Lesson Presentation:

To comprehend the subject of Monetary Policy, we must first understand the primary goal of
monetary policy, which is to balance the supply and demand for money. The demand for money
increases as the economy grows. Students should also understand that monetary policy is the method by
which a country's central bank controls the supply and availability of money, the cost of money, and the
interest rate.

In summary, monetary policy refers to the measures used by governments to influence economic
activity, specifically by manipulating the money supply and interest rates. Monetary policy and fiscal
policy are two approaches taken by the government to achieve or maintain high levels of employment,
price stability, and economic growth.

What is Monetary Policy?

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 Authored by: Prof Geric L. Baliao CIA, MBA.

Monetary Policy is a set of tools used by a nation’s central bank to control the overall money supply
and promote economic growth and employs strategies such as revising interest rates and changing bank
reserve requirements. It is the control of the quantity of money available in an economy and the
channels by which new money is supplied. Economic statistics such as gross domestic product (GDP), the
rate of inflation, and sector-specific growth rates influence monetary policy strategy. The Federal
Reserve Bank of the United States implements monetary policy with a dual mandate to maximize
employment while keeping inflation under control.

A Central Bank may revise the interest rates it charges to loan money to the nation’s banks. As rates rise
or fall, financial institutions adjust rates for their customer such as businesses or home buyers. In
addition, it may buy or sell government bonds, target foreign exchange rates, and revise the amount of
cash that the banks are required to maintain as reserves.

Types of Monetary Policy

Monetary policies are seen either expansionary or contractionary depending on the level of growth or
stagnation within the economy.

A. CONTRACTIONARY MONETARY POLICY

A Contractionary policy increases interest rates and limits the outstanding money supply to
slow growth and decrease inflation where the prices of goods and services in an economy rise
and reduce the purchasing power of money.
This policy is a monetary measure to reduce government spending or the rate of monetary
expansion by a central bank. It is a macroeconomic tool used to combat rising inflation. A
contractionary monetary policy is focused on contracting or decreasing the money supply in an
economy. This is also known as “Tight Monetary Policy’’.

The Contractionary Policy is a tool used to reduce government spending or the rate of monetary
expansion by a central bank to combat rising inflation. The main contractionary policies
employed by the United States includes raising interest rates, increasing bank reserve
requirements and selling government securities or expanding open market operations.
A Contractionary monetary policy utilizes the following variations of these tools:

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

• Increase the short-term interest rate (discount rate)

• Raise the Reserve Requirements
• Expand open market operations or selling securities
• Reduced Inflation.
• Slow down economic growth
• Increase Unemployment.

B. EXPANSIONARY MONETARY POLICY

Expansionary Monetary Policy works by rapidly increasing the money supply or lowering
short-term interest rates. The central bank enacts it through open market operations, reserve
requirements, and interest rate setting. During times of slowdown or a recession, an
expansionary policy grows economic activity. By lowering interest rates, savings become less
attractive, and consumer spending and borrowing increases.
A Central Bank may deploy an expansionist monetary policy to reduce unemployment and
boost growth during hard economic times. It usually does so by lowering its benchmarks federal
funds rate, or the interest rate banks use when they lend each other money to satisfy any
reserve requirements.

The primary tools that the central bank use to expand monetary policy include lowering the
discount rate/decrease in interest rate, increasing the purchase of government securities, and
reducing the reserve requirements. One example of expansionary monetary policy is the Federal
Reserve using Open Market Operation to buy securities from commercial banks to combat the
Great Recession. Buying these securities gives commercial banks more to loan out.

Tools of Monetary Policy

Central Bank have Three Main tools monetary policy tools: the reserve requirement, open market
operations, the discount rate or the interest rate. Most central banks also have a lot more tools at their
disposal. Here are the main primary tools and how they work together to sustain healthy economic
growth.

A. OPEN MARKET OPERATIONS

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

The main monetary instrument through which the central bank buys or sells
securities with financial institutions in open markets, thereby influencing the amount of
money in circulation and/or interest rates, is Open Market Operations.
The Federal Reserve Bank purchases bonds from investors or sells additional bonds to
investors during an Open Market Operations to change the number of outstanding
government securities and money available to the economy as a whole. The objective of
open market operation is to adjust the level of reserve balance to manipulate the short-
term interest rates and the affect of other interest rates.
Open Market Operation is the most commonly used tool of monetary policy in the
United States, because it takes place when the central bank sells or buys U.S Treasury
bonds in order to influence the quantity of bank reserves and the level of interest rates.

B. INTEREST RATES
Monetary Policy Interest Rates are interest rates set by the monetary authority (i.e.
the Central Bank) to influence the evolution of the main monetary variables in the
economy, such as consumer prices, exchange rates, or credit expansion, among others.
The Central bank may change the interest rates or the required collateral that it
demands. In the United States, this rate is also known as the discount rate. Banks will
loan more or less freely depending on this interest rates. Normally, Central Banks use the
policy interest rate to perform contractive or expansive monetary policy. A rise in interest
rates is commonly used to curb inflation, currency depreciation, excessive credit growth
or capital outflows.
The cost of borrowing money is the importance of interest rate. On the other hand, it
is the compensation for the service and risk of lending money. It keeps the economy
moving in both cases by encouraging people to borrow, lend, and spend.

C. RESERVE REQUIREMENTS
Reserve Requirements are the funds that a bank holds in reserve to ensure that it
can meet liabilities in the event of unexpected withdrawals. This is also a tool used by
the central bank to influence interest rates by increasing or decreasing the money supply
in the economy.
Authorities can manipulate the reserve requirements, because the funds that banks
must retain as proportion of the deposits made by their customer to ensure that they
can meet their liabilities. Lowering this reserve requirements releases more capital for
the banks to offer loans or buy other assets. Increasing the requirement curtails bank
lending and slows growth.
Reserve Requirements have an impact on monetary policy because an increase in
requirements forces banks to purchase temporary liquidity from the central bank, raising
their costs, and reducing lending activity, lowering public deposits. A reduction, on the
other hand, allows for an increase in deposit for any given monetary base.

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 Authored by: Prof Geric L. Baliao CIA, MBA.

Goals of Monetary Policy

A central bank enacts monetary policy with the goal of maintaining a level of economy and
keeping unemployment low, protecting the value of the currency, and sustaining economic growth. A
central bank influences borrowing, spending, and savings rates by manipulating interest rates or reserve
requirements, or by conducting open market operations. Monetary policy works in broad terms by
stimulating or inhibiting the growth of overall demand for goods and services in the economy. When
overall demand slows relative to the economy's ability to produce goods and services, unemployment
rises and inflation falls. Monetary policy has three main objectives: inflation, unemployment, and
exchange rates.

A. INFLATION
Inflation is the rate at which prices rise over a given time period. It is typically a broad measure,
such as the overall increase in a country's cost of living and the rate of rising prices of goods and services
in an economy. Inflation can occur when prices rise due to increase in production costs, such as raw
materials and wages. A surge in demand for products and services can cause inflation as consumers are
willing to pay more for the product. Contractionary monetary policy is used to control inflation and
reduce the amount of money in the economy. It causes inflation and increases the amount of money in
circulation

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 Authored by: Prof Geric L. Baliao CIA, MBA.

B. UNEMPLOYMENT

The term ''UNEMPLOYMENT'' refers to a situation in which a person actively

seeks work but is unable to find it. It is regarded as an important indicator of the
economy's health. The unemployment rate is the most commonly used measure of
unemployment. An expansionary monetary policy reduces unemployment because a
larger money supply and attractive interest rates stimulate business activity and job
market expansion.
Unemployment has an impact on the economy because of the societal costs of
high unemployment. Government costs extend beyond the payment of benefits to the
loss of worker output, which reduces the gross domestic product (GDP). Unemployment
has an impact not only on the individual but also on their spouses, partners, and
children.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

C. EXCHANGE RATES
The exchange rate is the relative price of one currency in relation to another or group of
currencies. An exchange rate is the cost of exchanging one currency for another between nations or
economic zones. It is used to determine the relative value of various currencies and is crucial in
determining trade and capital flow dynamics.

In a good market, a positive shock to the domestic currency exchange rate (an unexpected
appreciation) makes exports more expensive and imports less expensive. As a result, competition from
foreign markets will reduce demand for domestic products, resulting in lower domestic output and
prices. The exchange rates between domestic and foreign currencies can be affected by monetary
policy. With an increase in the money supply, the domestic currency becomes cheaper than its foreign
exchanges.

Monetary Policy vs Fiscal Policy

Monetary policy refers to central bank activities aimed at influencing the amount of money and
credit in an economy. Fiscal policy, on the other hand, refers to government decisions regarding taxation
and spending. Monetary policy refers to the actions of central banks to achieve macroeconomic policy
objectives such as price stability, full employment, and stable economic growth. Fiscal policy refers to the
tax and spending policies of the federal government.

A central bank enacts monetary policy to maintain an economy's level and keep unemployment
low, to protect the value of the currency, and to maintain economic growth. A central bank influences
borrowing, spending, and savings rates by manipulating interest rates or reserve requirements, as well as
through open market operations. On the other hand, Fiscal Policy is an additional tool used by the
government and not central bank. While the Federal Reserve can influence the supply of money in the
economy, The Treasury Department can create new money and implement new tax policies. It sends

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

money, directly or indirectly, into the economy to increase spending and spur growth. Both Monetary
Policy and Fiscal tools were coordinated efforts in a series of government and Federal Reserve program
launched in response to Pandemic Era.

According to financial experts, monetary policy is easier to implement than fiscal policy. The
reason for this is that the central bank can raise or lower interest rates without interference from
politicians. Fiscal policy, on the other hand, can face difficulties when implemented as a tax increase,
and government can be disrupted by politicians.

Key Takeaways for this topic;

• Monetary policy is a set of actions designed to control a country's total money supply and
promote economic growth.
• Monetary policy strategies include the revision of interest rates and the imposition of bank
reserve requirements.
• Monetary policy is commonly classified as either expansionary or contractionary.
• The Federal Reserve commonly uses three strategies for monetary policy including reserve
requirements, the discount rate and open market operations.
• The usual goals of fiscal and monetary policy are to achieve or maintain full employment, a high
rate of economic growth, and price and wage stability.
• Both monetary and fiscal policy are macroeconomic tools used to manage or stimulate the
economy.
• Monetary policy addresses interest rates and the supply of money in circulation, and it is
generally managed by central bank.
• Fiscal policy is concerned with taxation and government spending, and it is generally governed
by legislation.
• Monetary policy and fiscal policy together have a great influence over a nation’s economy, its
businesses and its consumers.

CHAPTER 1
MODULE POST-ASSESSMENT

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

DIRECTION: Carefully read the question and write the appropriate answer for each category.
1. How does Monetary Policy affect inflation?
2. How does Monetary Policy affect the economy?
3. How Monetary Policy can reduce unemployment?
4. What are the goals of monetary policy and what is the importance of each of the goals?
5. Which of the two types of monetary policy is more effective, particularly in terms of
executing for a better nation's growth?

REFERENCES

https://www.investopedia.com/terms/m/monetarypolicy.asp

Monetary Policy Meaning, Types, and Tools (investopedia.com)

https://www.investopedia.com/ask/answers/100314/whats-difference-between-monetary-policy-and-
fiscal-policy

Monetary Policy vs. Fiscal Policy: What's the Difference? (investopedia.com)

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

_________________________________ End of Chapter 1__________________________________

Chapter Two:
Introduction to The Philippine Financial System
Learning Objectives:

After the end of this lesson, students should be able to:

1. Explain and analyze the concept of a Financial System.

2. Consider the Philippine financial system and its operating environment.
3. Raise awareness of the role and connection of Bangko Sentral ng Pilipinas in Maintaining the
safety and stability of the financial system in general.
4. Acquire an understanding of the components of the Philippine Financial System.
5. Have a current understanding of the current trends that have shaped and improved our
country's current financial system.

Lesson Presentation:

The complexity of the Philippine Financial System has gradually increased as a result of aggressive
economic policy and structural changes in the 1980s and 1990s. The sustained thrust of the reform
process in the 1990s facilitated the local financial system's rapid expansion and eventual integration with
the rest of the world. With the introduction of new technology, greater transparency, and broader
growth opportunities, structural reform that allowed freer entry of foreign capital paved the way for
healthy competition and increased efficiency. Increased financial integration has also made the country
more vulnerable to external shocks and risks. The Asian financial crisis in 1997 revealed the country's
vulnerability to shocks. While several policy measures were implemented to address these weaknesses,
the emergence of new risks would necessitate constant recalibration of such measures as well as the
evolution of new ones.

A financial system is a collection of complex and intricately linked financial institutions, markets,
instruments, services, practices, and transactions designed to provide an efficient and consistent link
between investors and depositors. A group of Filipinos conceptualized a central bank for the Philippines
as early as 1933, according to History of Central Banking and Bangko Sentral ng Pilipinas. After a careful

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 Authored by: Prof Geric L. Baliao CIA, MBA.

study of the economic provisions of the Hare-Hawes Cutting Bill, the Philippines Independence bill
approved by the US Congress, it came up with the rudiments of a bill for the establishment of the
country's central bank.

The Philippine Financial System

Topics definition of terms;

What is the term ‘’System’’ means?
It is a group of interacting or interrelated elements that act according to a set of rules to form a
unified whole. A system, surrounded and influenced by its environment and also described by its
boundaries, structures and purpose and is expressed in its functioning.

Some of its definitions include a group of units working together to achieve a common goal, an
organized set of doctrines, ideas, or principles, and, finally, an organized or established set of
procedures.

What is the Financial System?

A financial system is a collection of institutions and practices that enable and facilitate the
exchange of funds among borrowers, lenders, and investors. Financial systems exist at the firm, regional,
and global levels. Banks and government treasuries are examples of such institutions.

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 Authored by: Prof Geric L. Baliao CIA, MBA.

It is a structured and regulated environment in which funds are exchanged between the lender
and the borrower. It provides the financial inputs required for the production of goods and services. As a
result, the country's people's well-being and standard of living improve.

The financial system of a country consists of its banks' securities markets, pension and mutual
funds, insurers, market infrastructure, central banks, and regulatory and supervisory authorities. It also
consists of institutional units and markets that interact, typically in a complex way, to mobilize funds for
investment and provide facilities, such as payment systems for commercial activity financing.

What is the Philippine Financial System?

The Philippines is a dynamic economy with a smaller financial system dominated by banks than
other Asian emerging market economies. The system's total assets equal 126% of GDP (Gross Domestic
Product). However, bank credit accounts for slightly more than half of GDP and is primarily used by non-
financial corporations (NFCs). The financial system function in the Philippines is where the banking and
finance sector plays a critical role in the Philippines economy, as it is primarily responsible for mobilizing
domestic savings and converting these funds into directly productive investments.

In the Philippines, the financial system allows for the mobilization of funds between those who
have them (lenders/savers) and those who need them (borrowers/spenders) through a systematic
intermediation process carried out by Financial Institutions. The quality of financial institutions is critical
to a country's financial stability and economic growth. Banks, in particular, play a critical role in
mobilizing and channeling funds into investments and other productive uses. Hence, they play a
prominent role in resource allocation and are the main drivers of economic development.

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 Authored by: Prof Geric L. Baliao CIA, MBA.

The state recognizes the critical role of banks in fostering the long-term development of the national
economy, as well as the fiduciary high standards of integrity and performance. As a result, it charged the
Central Bank with ensuring the financial system's overall safety and stability, as well as the banking
system in particular.

This mandate is carried out by the Bangko Sentral ng Pilipinas through the Financial Supervision
Sector, which is primarily responsible for creating a regulatory environment that allows the banking
system to thrive, promotes economic development, and maintains the public's trust and compliance
with these prudential requirements by the Bangko Sentral ng Pilipinas Supervised Financial Institutions.
Simultaneously, the Financial Supervision Sector provides sufficient incentives for Financial Institutions to
engage in activities that would provide Filipinos with appropriate financial products and services.

Financial Structure and Monetary Policy in the Philippines

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 Authored by: Prof Geric L. Baliao CIA, MBA.

The financial structure comprises the Monetary Authorities (Central Bank of the Philippines and
the Ministry of Finance) consist of the following;

*32 Commercial Banks,

*93 Rural Banks,

*10 Savings Banks,

* 37 Development Banks

*72 Stocks Savings and Loans Association

*250 Finance Companies

*12 Investment Houses

*59 Investment Companies

*448 Pawnshops and various specialized Financial Institutions.

* Some of the Financial Institutions are the government or semi-government owned,

The Philippine National Bank (PNB), The Philippine Veterans Bank, The Development Bank of the
Philippines (DBP), Land Bank, Philippine Amanah Bank, and the specialized, non-bank institutions. The
public sector plays an important part of in the financial system in terms of the share of Government
financial Institutions’ assets to the total assets of the financial system and the share of Government
Financial Institutions lending to the total.

Recent Trends in Philippine Financial System.

The Philippine Banking System (PBS) maintained its solid footing, as evidenced by continued asset,
deposit, and profit growth, as well as stable capital and liquidity buffers and ample loan loss reserves.

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 Authored by: Prof Geric L. Baliao CIA, MBA.

The Philippine Banking System's total assets increased by 6.9% year on year to P 20.8 trillion at the end
of March 2022.

The Philippine Banking Industry is also undergoing significant consolidations, with mergers amd
acquisitions becoming increasingly common. This trend has been driven by the desire of the banks to
expand their market reach, improve their competitiveness, and increase their efficiency.

The Philippine Financial System is at moderate risk of being used for money laundering, terrorist
financing, and the funding of weapons of mass destruction. According to the findings of the central
bank's most recent multi-sectoral assessment.

Since the ASIAN Financial Crisis (AFC), the Philippine financial markets have grown significantly.
Financial liberalization, prudential supervision, and regulatory reforms have significantly improved the
domestic financial markets' and institutions' stability, efficiency, depth, and accessibility.

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 Authored by: Prof Geric L. Baliao CIA, MBA.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

CHAPTER 2
MODULE POST-ASSESSMENT
DIRECTION: Carefully read the question and write the appropriate answer for each category.
1. What constitutes an effective financial system, according to the topics covered in this chapter?
2. What is the importance of Financial System in our economy?
3. Is the financial system important for a country's economic growth, and if so, why?
4. What do you think is the most important financial regulatory body that Philippine Financial
System have?
5. Are you familiar with the current trends and updates in our country's financial system as a
Business student? If so, could you please explain what they are?

REFERENCES
https://www.bsp.gov.ph/Media_And_Research/Publications/ReportonRecentTrends2022-03.pdf

ReportonRecentTrends2022-03(withMemo).pdf (bsp.gov.ph)

https://link.springer.com/chapter/10.1007/978-1-349-16454-7_7

Financial Structure and Monetary Policy in the Philippines | SpringerLink

__________________________________ End of Chapter 2__________________________________

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 Authored by: Prof Geric L. Baliao CIA, MBA.

Chapter Three:
The Philippine Financial System and the Central Bank of the Philippines
Learning Objectives:

After the end of this lesson, students should be able to:

1. Attain an understanding of the importance of the elements of Financial System

2. To know what are the main objectives of Central Bank of the Philippines
3. Name all the elements of the Financial System and its purpose.
4. Discuss the full history of Bangko Sentral ng Pilipinas.
5. To fully comprehend how the Bangko Sentral ng Pilipinas intends to improve the Philippine
economy.

Lesson Presentation:

A financial system is a collection of complex and intricately linked financial institutions, markets,
instruments, services, practices, and transactions designed to provide an efficient and consistent link
between investors and depositors. The Philippines is a dynamic economy with a relatively smaller
financial system than other Asian emerging market economies, dominated by banks. The total assets of
the system amount to 126% of Gross Domestic Product. However, bank credit is just over 50% of the
Gross Domestic Product and mostly goes to Non-financial Corporates. The Central Bank's role in the
financial system is to conduct monetary policy by adjusting the supply of money, typically by buying and
selling securities on the open market. Short-term interest rates are influenced by open market
operations, which in turn influence longer-term interest rates and economic activity. The Central Bank of
the Philippines' primary goal is to maintain price stability in order to promote balanced and sustainable
economic and employment growth. It will also promote and maintain monetary stability and the peso's
convertibility.

In this chapter, we will discuss the central bank's major role in our country's financial system and
refresh our memories about the history of the Bangko Sentral ng Pilipinas, as well as the factors that
demonstrate that the central bank is the primary contributor to the success and stability of our country's
financial system.

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 Authored by: Prof Geric L. Baliao CIA, MBA.

KEY ELEMENTS OF THE FINANCIAL SYSTEM

1. The Ultimate lenders and borrowers

- the non-financial economic units that undertake the lending and borrowing process. The
ultimate lenders lend to borrowers either directly or indirectly via financial intermediaries,
by buying the securities they issue.
2. The Financial Intermediaries
- In which intermediate the lending and borrowing process. They interpose themselves
between the lenders and borrowers and earn a margin for the benefits of intermediation
(including lower risk for the lender). They buy the securities of the borrowers and issue their
own to fund these (and thereby become intermediaries)
3. The Financial Instruments (or assets)
- In which are created/issued by the ultimate borrowers and financial intermediaries to satisfy
the financial requirements of the various participants. These instruments may be marketable
(e.g. Treasury Bills) or non-marketable (e.g. retirement annuities)
4. The Creation of Money
- It is by banks when they satisfy the demand for new bank credit. This is a unique feature of
banks. Central Bank have the tools to curb money growth.
5. The Financial Markets
- i.e the institutional arrangements and conventions that exist for the issue and trading
(dealing) of the financial instruments.
6. The Price Discovery
- i.e the establishment in the financial markets of the price of money, i.e the rates of interest
on debt (and deposit) instruments and the prices of share instruments.

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 Authored by: Prof Geric L. Baliao CIA, MBA.

The Importance of the Financial System

The financial system is critical to the economy. It facilitates the flow of funds between savers and
borrowers, ensuring that financial resources are allocated efficiently to promote economic growth and
development. It enables the financial intermediation process which facilitates the flow of funds between
savers and borrowers, thus ensuring that financial resources are allocated efficiently towards promoting
economic growth and development.

Key Functions of Financial Management

- Financial Planning and Forecasting

It is the prediction of the value of a variable or set of variables at some point in the
future. A forecasting exercise is typically performed in order to aid future decision-making and
planning.

- Cash Management

It is the collection and management of cash flow generated by operating, investing, and
financing activities. A cash management system enables you to manage cash handling from start
to finish and automate it all the way through to reconciliation.

- Financial Reporting

Financial reporting is the process by which businesses communicate financial

information to both external and internal stakeholders. Financial reports are used by external
stakeholders, such as regulatory agencies, current and potential shareholders and investors, and
lenders, to draw conclusions about a company's current and future financial health.

- Financial Control

These are the policies and procedures in place to prevent or detect accounting mistakes
and fraud. It enables an organization to direct, allocate, and utilize its financial resources.

- Risk Management

It is the process of identifying risks, analyzing them, and making investment decisions
based on whether they should be accepted or mitigated. These can be quantitative or qualitative
risks, and it is a finance manager's responsibility to use available financial instruments to hedge a
business against them.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

History of Central Banking and Bangko Sentral ng Pilipinas (BSP)

CHRONOLOGICAL OF EVENTS HISTORY OF THE BANK

CENTRAL BANK OF THE PHILIPPINES (BANGKO SENTRAL NG PILIPINAS)
YEAR 1990 ACT No. 52 was passed by the First Philippine
Placing all banks under the Bureau of Treasury.
The Insular Treasurer was authorized to supervise
and examine banks and banking activities.
FEBRUARY 1929 The Bureau of Banking under the Department of
Finance took over the task of banking
supervision.
YEAR 1939 A bill establishing a central bank was drafted by
Secretary of Finance Manuel Roxas and approved
by the Philippine Legislature. However, the bill

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

was returned by the US Government, without

action, to the Commonwealth Government
YEAR 1946 A joint Philippine-American Finance Commission
was created to study the Philippine currency and
banking system. The commission recommended
the reform of the monetary system, the
formation of central bank and the regulation of
money and credit.
AUGUST 1947 A Central Bank Council was formed to review the
Commissions report and prepare the necessary
legislation for implementation
FEBRUARY 1948 President. Manuel Roxas submitted to congress a
bill ‘’Establishing the Central Bank of the
Philippines, defining its powers in the
administration of the monetary and banking
system, amending pertinent provisions of the
Administrative Code with respect to the currency
and the Bureau of Banking, and for other
purposes.
JUNE 15, 1948 The Bill was signed into law as REPUBLIC ACT
NO.265 (THE CENTRAL BANK ACT) by President
Elpidio Quirino.
JANUARY 3, 1949 The Central Bank of the Philippines (CBP) was
inaugurated and formally opened with Hon.
Miguel Cuaderno SR. as the first governor.

The broad policy objectives contained in RA No.

265 guided the CBP in the implementation of hid
duties and responsibilities, particulary in relation
to the promotion of economic development in
addition to the maintenance of internal and
external monetary stability.
NOVEMBER 1972 RA. No.265 was amended by Presidential Decree
No. 72 to make the CBP more responsive to
changing economic conditions.

Presidential Decree No. 72 emphasized the

maintenance of domestic and international
monetary stability as the primary objective of the
CBP. Moreover, the CBP’s authority was expanded
to include not only the supervision of the banking

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

system but also the regulation of the entire

financial system.
JANUARY 1981 Further amendments were made with issuance of
PD No. 1771 to improve and strengthen the
financial system, among which was the increase
in the capitalization of the CBP from P 10 million
to P 10 billion.
YEAR 1986 Executive Order No. 16 amended the Monetary
Board membership to promote greater harmony
and coordination of government monetary and
fiscal policies.
JULY 3, 1993 Republic Act No. 7653 was passed establishing
the Bangko Sentral ng Pilipinas (BSP) replacing
Central Bank of the Philippines as the country’s
central monetary authority.
FEBRUARY 14, 2019 Republic Act. No. 11211 was passed amending RA
No. 7653. The charter amendments bolster the
capability of the BSP to safeguard price stability
and financial system stability.

ABOUT THE BANGKO SENTRAL NG PILIPINAS

The Bangko Sentral ng Pilipinas (BSP) is the Central bank of the Republic of the
Philippines. It was established on July 3,1993 pursuant to the provision of the 1987 Philippine
Constitution and the New Central Bank Act of 1993. The BSP took over from Central Bank of the
Philippines, which was established on January 3,1949, as the country’s central monetary
authority. The BSP enjoys fiscal and administrative autonomy from the National Government in
the pursuit of its mandated responsibilities.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

CHAPTER 3
MODULE POST-ASSESSMENT
DIRECTION: Carefully read the question and write the appropriate answer for each category.
1. What are the key components of the financial system, and can you explain each one?
2. What are the important points in the history of Bangko Sentral ng Pilipinas?
3. What are the important roles that the BSP plays in the economic growth and stability of the
Philippines?
4. How important is knowing financial system in our country?
5. What is the composition of the BSP's organizational structure, and what role does each bank
designation play?

REFERENCES:

Who We Are - History of the Bank (bsp.gov.ph)

https://www.bsp.gov.ph/Pages/AboutTheBank/SealCharterAndHistory/HistoryOfTheBank/Chronolog
yOfEventsCentralBankingInThePhilippines.aspx?fbclid=IwAR1Jp-
3hQfyvyCMkB3wSErHLWyRz6IMj_L2QffMcNun4CGinbCypUB7H-CU

____________________________________END OF CHAPTER 3________________________________

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Chapter FOUR:
The Financial Claims
Learning Objectives:

After the end of this lesson, students should be able to:

1. Define what is money and its essential functions in the economy

2. Value money as a commodity and its role
3. Make use of the learning to contribute to the stability of the Philippine Financial System
4. Explain the impact of interest rates and their volatility in the financial environment
5. Attain an understanding of interest rate as crucial part of the financial instruments
6. Draw comparison between nominal and real interest rates

LESSON PRESENTATION

Money is any object that is generally accepted as payments for goods and services and
repayment of debts in a given socio-economic context or country. Many items have been historically
used as commodity money, including naturally scarce precious metals, conch shells, barley beads and
other things that we are considered to have value. The value of commodity money comes from the
commodity out of which it is made. The commodity itself constitutes the money, and the money is the
commodity.

Financial Claims

Financial claims and obligations arising from contractual relationships between pairs of
institutional units. A financial claim,

(a) entitles a creditor to receive a payment, or payments, from a debtor in circumstances

specified in a contract between them: or
(b) specifies certain rights or obligations between the two parties, the nature of which requires
them to be treated as financial.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Financial claims are obligations which arise out of contractual relationships between pairs of
institutional units. It entitles a creditor to receive a payment from a debtor in circumstances specified in
a contract between them. Types of financial claims that are available are stocks and shares, Investment
Bonds and with Profit Bonds, Personal Equity Plans, Open Ended Investment Companies, and Assets
Classes. A financial claim is an asset that typically entitles the creditor to receive funds or other
resources from the debtor under the terms of a liability. Each claim is a financial asset that has a
corresponding liability.

Money and its Functions

Money is what people in a society regularly use when purchasing or selling goods and services. If
money were not available, people would need to barter with each other, meaning that each person
would need to identify others with whom they have a double coincidence of wants- that is each party
has specific good or services that the other desires. Money serves several functions: a medium of
exchange, a unit of account, a store of value, and a standard of deferred payment.

There are two types of money: COMMODITY MONEY which is an item used as money, but which also
has a value from its use as something other than money: and FIAT MONEY, which has no intrinsic value
but is declared by a government to be the legal tender of a country.

1. Money as the Medium of Exchange

Money was invented to eliminate the disadvantages of bartering by separating the act of
purchasing from the act of sale. Money's basic or primary purpose is as a means of trade. People
exchange products and services using money as a medium of exchange. Money serves as a medium

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

of exchange or a means of payment. Money has no utility in and of itself (save perhaps to the miser).
It is merely a n intermediary.

Example: Money can be used to buy and sell goods and services. Money is used as medium
of exchange because it’s the intermediary in the exchange process.

Scenario: Someone who wants a phone can buy it with money and if someone want to sell a phone, that
also can be done by receiving money.

2. Money as a Unit of Account or Measure of Value

Money is a unit of account or a unit of worth. Money is the measuring rod, or the units in
terms of which the worth of other products and services are measured and expressed in money
terms. Different items manufactured in the country are measured in various units, such as cloth in
metres, milk in litres, and sugar in kilos.

Example: Money is expressed in units of a currency, money act as a measure of value that
enables people to compare the value of different goods and services.

Scenario1: Assume that admission in movie in Philippines is P 500.00 and a latte in Starbucks
is P 250.00.

Scenario2: A 1 liter of Milk is worth P 100.00 while the 1.5 liter of is worth P 130.00.

Assume that admission in movie in USA is $ 10.00 and latte in Starbucks is $5.00.

3. Money as the Standard of Deferred Payments

Deferred payments are payments which are made sometime in the future. Debts are
usually expressed in terms of the money account. Loans are taken and repaid in terms of money.
The use of money as the standard of deterred or delayed payments immensely simplifies
borrowing and lending operations because money generally maintains a constant value through
time. Thus, money facilitates the formation of capital markets and the work of financial
intermediaries like the Stock Exchange, Investment Trust, and Banks. Money is the link that
connects the values of today with those of the future.

Example: Money acts as a standard of deferred payment. It means payment to be made

in future can be expressed in terms of money. Credit is given in terms of money.

Scenario: If a person needs 10 kilograms of rice but does not have the required amount
of money with him at the time, he borrows this amount.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

4. Money as a Store of Value

Wealth can be stored in terms of money for the future. It serves as a store value of
goods in liquid form. By spending it, we can get any commodity in the future. Holding money is
equivalent to keeping a reserve of liquid assets because it can be easily converted into other
things.

Example: An example of a store of value is someone earning money on their paycheck

and then depositing in the bank later on. They can then withdraw this money, knowing it
retained its value over time and spend it on goods and services.

Scenario: Mr. Baliao earns P 50,000.00 per month as a Finance Manager; he then saves
P10,000.00 for a savings fund and P 5,000.00 for insurance as an emergency fund.

WHAT IS INTEREST RATE?

Simply explained, interest is the cost of borrowing money, whether it's through a school loan, a
mortgage, or a credit card. When you borrow money, you must typically repay the initial amount
borrowed plus a percentage of the loan amount as interest. Monetary policy can push the entire
spectrum of interest rates higher or lower, but the specific interest rates are set by the forces of supply
and demand in those specific markets for lending and borrowing. One way that interest rates matter is
they influence borrowing coats. If interest rates are lower, that will encourage more people to take out a
mortgage and purchase a house, purchase an automobile, or take out a loan for home improvement,
those kins of things.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Interest Rates are very crucial part of financial instrument and the financial instruments and the
financial instruments and the financial industry as a whole. They help the investors and financial
managers to decide to choose the right instrument for their need and risk profile. But simply analyzing
the interest rates will not suffice for long term investments as inflation also pays a major role in that.

Types of Interest Rate

NOMINAL INTEREST RATES

It refers to the interest rate before adjusting for inflation. Nominal can also refer to the
advertised or reported interest rate on a loan, excluding any fees or interest compounding. Nominal
interest rates are the rate of return which an investor or borrower will get or have to pay in the market
without any adjustment for inflation. For example, rate of interest on bank accounts, bonds, loans, etc.
are all nominal interest rates. Nominal interest rate is really easy to understand,

Example: If you have deposited $ 100.00 in your bank account and your bank is offering a 5% per
annum interest rate, you will have $105.00 in your account by the end of the year.

($100 + 0.05x100) = $105.00

REAL INTEREST RATES

A real interest rate represents the preference for current goods over future ones over time. For
an investment, a real interest rate is calculated as the difference between the nominal interest rate and
the inflation rate. Nominal interest is quite an easy concept to understand. But when we see the effect of
inflation on top of that, things become more interesting.

Real Interest rate

Nominal Interest Rate – Rate of inflation (Expected or Actual)

Example: Continuing the above example, depositing money in a bank will give us 5% interest and we will
earn $5 in interest. But if the inflation is 3% per annum, it means that goods and services which we can
buy at, let say $100.00, we have to pay $103.00 now for the same amount of goods and services. So
effectively, we have earned only $2.00 ($5.00-$3.00). So basically, real interest rates will give the real
picture of the purchasing power of the consumer.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

CHAPTER 4

MODULE POST-ASSESMENT

DIRECTION: Carefully read the question and write the appropriate answer for each category.

1. Explain and discuss the topic of financial claims. Is a financial claim a liability or an asset?
Please elaborate.
2. What are the two types of money, and could you help explain what they mean?
3. Which function of money is most important to you, and please explain and provide examples?
4. Why do interest rates matter in the economy?
5. Why should investors know the difference between nominal and real interest rates?

________________________________ END OF CHAPTER 4_____________________________________

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Chapter FIVE: The Financial Institutions

Learning Objectives:

After studying this chapter, students should be able to:

1. Define what is Financial Institution.

2. Perceive an overview of how much financial institutions works in the financial system and its
classification.
3. Classify different financial institution accordingly.
4. To read more about the distinction between a financial institution and a financial intermediary.
5. To comprehend the various functions of Philippine financial institutions.

LESSON PRESENTATION

Financial institutions are critical because they create a marketplace for money and assets,
allowing capital to be allocated efficiently to where it is most beneficial. We may say that learning
financial literacy can help people achieve their goals. Individuals can make strategies that set
expectations, keep them accountable to their finances, and chart a route for accomplishing seemingly
unattainable goals by better knowing how to budget and save money. Without financial institutions,
businesses could not grow. And households could only buy goods, education, and housing that families
have cash for today.

What is a Financial Institution?

The term ''Financial Institution'' refers to any organization that provides financial services to
consumers who have a credit, deposit, trust, or other financial account or relationship with the
organization. It is a company engaged in the business of dealing with financial and monetary transactions
such as deposits, loans, investments, and currency exchange. Financial Institutions include a broad range
of business operations within the financial services sector, including banks, insurance companies,
brokerage firms, and investment dealers. Virtually everyone living in a developed economy has an
ongoing or at least periodic need for a financial institution’s services.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Financial institutions frequently connect funds from savers or investors with individuals in need
of finances, such as borrowers or firms looking to sell shares of ownership for funding. Typically, this
results in future payments to the saver or investor from the borrower or firm. Products such as loans and
markets such as stock exchanges are used to connect all of these parties. At the most basic level,
financial institutions allow people to access the money they need. For example, although bank do many
things, their primary role is to take in funds-called deposits-from those with money, pools the deposits
and lend the money to others who need funds. Bank intermediaries between depositors (who lend
money to the bank) and borrowers (who the bank lends money to).

This works well because, while some depositors require their funds immediately, the majority do
not. Deposits can thus be used by banks to make long-term loans. This is true for practically every
organization and person in a capitalist system, including people and households, financial and non-
financial firms, and national and local governments.

KEY TAKEAWAYS FROM THE SUBJECT OF FINANCIAL INSTITUTIONS

- A financial institution is a company engaged in the business of dealing with financial and
monetary transactions such as deposits, loans, investments, and currency exchange.
- Financial institutions are vital to a functioning capitalist economy in matching people seeking
funds with those who can lend or invest it.
- Financial institutions encompass a broad range of business operations within the financial
services sector including banks, insurance companies, brokerage firms and investment
dealers.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

- Financial institutions vary by size, scope and geography.

Types of Financial Institutions

Financial institutions provide a wide range of products and services to both individual and commercial
clients. The specific services provided by different types of financial organizations vary greatly.
Consumers are more likely to use the following types:

1. Banks, Credit Unions and Savings & Loans Association

These financial institutions accept deposits and offers checking and savings account services;
make business, personal, and mortgage loans; and provides basic financial products like certificates of
deposit (CDs). They may also act as payment agents via credit cards, wire transfers, and currency
exchange.

These types of financial institutions can include:

- Commercial or private banks

- Savings and loans association

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

- Credit Unions
- Foreign Banks
- Savings banks, industrial institutions, thrifts.
-
2. Investment Companies, Advisors and Brokers

Investment firms create and manage securities (stocks, bonds, mutual funds, and ETFs, or
exchange-traded funds). Mutual funds are one type of product given by an investing firm, in which
money from numerous individuals is pooled and invested in stocks, bonds, money market
instruments, other securities, or even cash on an ongoing basis. Other examples of investment-
related financial institutions include investment advisors and brokers. Brokers accept and carry out
orders to buy and sell investments (such as securities) for customers.

3. Insurance Companies

Insurance firms are among the most well-known non-bank financial institutions. One of the
oldest financial services is the provision of insurance to individuals or organizations. Asset protection
and financial risk protection, as provided by insurance products, is a critical service that supports
individual and corporate investments that fuel economic growth.

Why are Financial Institutions Important?

Financial institutions are essential because they provide a marketplace for money and assets
so that capital can be efficiently allocated to where it is most useful. For example, a bank takes in
customer deposits and lends the money to borrowers. Without the bank as an intermediary, any
individual is unlikely to find a qualified borrower or know how to service the loan. Via the bank, the
depositor can earn interest as a result. Likewise, investment banks find investors to market a
company’s shares or bonds to. Financial institutions help keep capitalist economies running by
matching people who need funds with those who can lend or invest it. They offer a wide range of
business operations within the financial services sectors including banks, credit unions, insurance
companies and brokerage firms.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

FINANCIAL INSTITUTION vs FINANCIAL INTERMEDIARY

A financial institution varies from a financial intermediary primarily in that the latter merely
enables the transfer of funds from a surplus fund holder to a surplus fund consumer. Financial
institutions are all financial intermediaries, but not all financial intermediaries are financial institutions.

Most people are served by financial institutions in some way, as financial operations are an
important element of any economy, with individuals and businesses relying on financial institutions for
transactions and investing. Because banks and financial institutions play such an important role in the
economy, governments believe it essential to control and regulate them.

Financial Intermediary is an entity that act as the middleman between two parties in financial
transaction, such as commercial banks, investment bank, mutual fund or pension fund. It is very
important source of external funding for corporates. Unlike the capital markets where investors contract
directly with the corporates creating marketable securities, financial intermediaries borrow from lenders
or consumers and lend to the companies that need investment.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

CHAPTER 5

MODULE POST-ASSESMENT

DIRECTION: Carefully read the question and write the appropriate answer for each category.

1. What exactly is a financial institution and what is its purpose?

2. What are the most important financial institution topics that everyone should be aware of?
3. What are the types of financial institutions, and can you explain and provide examples for each
one?
4. What are mutual funds, and why are they important in the context of investing firms?
5. Describe the distinction between financial institutions and financial intermediaries.

REFERENCES:

What is a Financial Institution? (investopedia.com)

https://www.investopedia.com/terms/f/financialinstitution.asp

___________________________ _ END OF CHAPTER 5 _____________________________________

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Chapter SIX: The Financial Institutions PART II

Learning Objectives:

After studying this chapter, students should be able to:

1. Identify the key functions of Financial Institution.

2. Perceive an understanding of the differences among non-bank institutions
3. Provide a list of the different non-bank institutions in the country.
4. To understand that non-banking financial institution supplements banks in providing financial
services to individual and firms.
5. To understand the differences between non-banking institutions and commercial banks.

LESSON PRESENTATION

Banks are mainly focused on providing retail banking products and services, while non-banking
financial institutions offer a wider range of products and services, including corporate banking,
investment banking, and private banking. Non-banking institutions are places where people can apply
for loans. Loans will be processed when the general public provides collateral in the form of products or
securities. This tool is useful when people need money quickly to acquire necessities. They can obtain
several loans by pledging a cellphone or a television as collateral.

Non-banking financial institutions have an advantage in that they can give loans and credit. They
can deal in money market instruments and manage wealth by managing stock and share portfolios.
Finally, it can underwrite stock, shares, and other obligations.

Key Functions of a Financial Institution

1. Financial Liquidity- The ease with which an asset can be turned into cash is referred to as
financial liquidity. In contrast, a liquid asset cannot be easily converted into cash and is
difficult to trade.
Example: Cash is the most ‘’liquid ‘’ form of liquidity. In addition to notes and coins, it
also includes account balances and cheques, as well as cash in foreign currencies. Other
forms of liquidity assets that can be converted into cash very quickly due to their low risk
and short maturity are treasury bills and treasury notes.

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 Authored by: Prof Geric L. Baliao CIA, MBA.

2. Financial Intermediation- Financial intermediaries transfer money from parties with excess
capital to parties in need of money. The approach results in more efficient markets and
lowers the cost of doing business. A financial advisor, for example, connects with clients by
purchasing insurance, stocks, bonds, real estate, and other assets. funding needs
Example: Some of the examples are commercial banks, stock exchanges, mutual fund
companies, insurance companies, credit unions, non-banking finance companies (NBFCs),
pension funds, building societies, financial advisors, investment bankers, escrow companies.
3. Maximization of Profit- Profit maximization is the process by which a company maximizes its
income or profit. The profit maximization theory holds that the purpose of a business is to
maximize profits. When marginal revenue and marginal cost are identical, the sales level at
which profit maximization occurs.
Example: One way of it is the method of price discrimination followed by certain monopoly
firms to maximize their profits. For example, certain large firms give quantity discounts to
their buyers, thereby including them to buy more of the good. They offer discounts like 10%
off on buying 3 goods, 20% off on buying 4 and so on.
4. Financial Risk Management- The practice of detecting and managing current and potential
financial hazards in order to lower an organization's risk exposure is known as financial risk
management. Financial Risk Management is responsible for identifying threats to assets,
analyzing business risk, and providing a solution to business risk. Furthermore, they are in
charge of designing measures to mitigate the consequences of a shifting market on business
and finances.
Example: At the individual level, some risk management strategies include: Risk avoidance:
elimination of activities that can expose the individual to risk ; for example, an individual can
avoid credit/debit financing risk by avoiding the usage of credit to make purchases.

NON-BANKING INSTITUTIONS
A non-banking financial institution, also known as a non-bank financial
corporation, is a financial institution that is not legally a bank; it lacks a complete banking
license and is not monitored by a national or international banking regulatory agency.

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 Authored by: Prof Geric L. Baliao CIA, MBA.

TYPES OF NON-BANKING INSTITUTIONS

1. Non-Stock Savings and Loan Association - An NSSLA shall include any non-stock, on-profit
corporation engaged in the business of accumulating the savings of its members and using
such accumulations for loans to members to service the needs of households by providing
long-term financing for home building and development and for personal finance.
Example: The Metropolitan Bank and Trust Company and the Bank of the Philippine Island.

2. Credit Cooperative- It generates a common pool of funds in order to provide financial

assistance and offer related financial services to its members for productive and provident
purposes.
Example: ACDI Multi-Purpose Cooperative, and the Cebu CFI Community Cooperative

3. Brokers and Dealers- A broker is one who will buy and sell securities for their clients; A
dealer is a person who will buy and sell securities on their own account.
Example: First Metro Securities Brokerage Corporation and COL Financial Group Inc.

4. Investment Houses- An investment house is any enterprise that primarily engages in the
underwriting of securities
Example: Philippine Commercial Capital Incorporated and Capital One Equities Corporation

5. Investment Companies- An investment company is a corporation or a trust through which

individuals invest in diversified, professionally managed portfolios of securities by pooling
their funds with those of other investors
Example: Eastgate Capital Partners Inc. and FSG Capital Inc.

6. Insurance Companies- Expenses that may arise due to some unforeseen event at some
uncertain time in the future.
Example: Pru Life UK and Sun Life Canada

7. Pre-Need Companies- Pre-need plans are contracts, agreements, deeds or plans for the
benefit of the plan holders which provide for the performance of future services.
Example: Ayala Plans, Inc. and Caritas Financial Plans

8. Pawnshop- shall refer to an entity engaged in the business of lending money on personal
property that is physically delivered to the control and possession of the pawnshop operator
as loan collateral.
Example: Cebuana Lhuiller and Palawan Pawnshop

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

9. Credit Card Companies- The principal services of the credit card business include the
settlement of charges in respect of the use of credit cards, the issuance and management of
credit cards, and the recruitment and support of merchants accepting credit cards.
Example: Citi Cash Back Card and BDO Visa Classic Card

10. Remittance Agents- Entities that offer to remit, transfer or transmit money on behalf of any
person to another person and/or entity.
Example: LBC Home and MoneyGram.

11. Money Changers/ Foreign Exchange Dealers- Refers to any entity who engages in money
changing/foreign exchange dealing business.
Example: M Lhuillier and Cebuana Lhuillier

12.E-Money Institutions- are the digital alternative of banks, operating through an online
platform and licensed to manage transactions and issue debit cards. EMI clients can use
either the platform for their issued debit card to carry out payments transactions.
Example: G-Cash and Maya App

13.Credit Granting Entities- Are those entities who, during their business, extend credit
through installment or deferred payment sale, such as but not limited to real estate dealers
and property developers, car and other vehicle dealers, or appliance stores.
Example: Quasi-Banks and Trust departments/Corporations.

14.Financing Companies- Engaged in specialized forms of financing such as: direct lending or
by discounting or factoring commercial papers or accounts receivable; buying & selling
contracts, leases, chattel mortgages, or other evidences of indebtedness, financial leasing of
movable and immovable property.
Example: General Motors Acceptance Corporations (GMAC) and Home Credit Philippines

15.Lending Companies- A corporation engaged in granting loans from its own capital funds
or from funds sourced from not more than 19 persons.
Example: Radio wealth Finance and Esquire Financing Philippines.

16.Trust Corporation- A stock corporation created to engage primarily in trust, other

fiduciary business and investment management activities, which shall act as trustee or
administer any trust or hold property in trust or on deposit for the use and benefit of others,
and/or act as financial consultant, investment adviser or portfolio manager.
Example: Asia United Bank Corporation and ATRAM Trust Corporation.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

CHAPTER 6

MODULE POST-ASSESMENT

DIRECTION: Carefully read the question and write the appropriate answer for each category.

1. What are the primary functions of a financial institution, and how should they be discussed?
2. What distinguishes bank institutions from non-bank institutions?
3. Explain the Difference between financing companies and lending companies?
4. Give at least 5 examples of non-Banking institutions.
5. What is the fundamental aim of investment houses in non-banking entities, and how does it
differ from investment?

__________________________________END OF CHAPTER 6_________________________________

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Chapter SEVEN: Bank Management Part 1

Learning Objectives:

After studying this chapter, students should be able to:

1. Define what is the purpose of bank.

2. Describe the intermediation process and role of banks in the economy.
3. Highlight the difference of various types of banks.
4. Discuss the main importance of bank management in nations economic status.
5. To learn more about how monetary policy affects bank management.

LESSON PRESENTATION

Bank management is the process of overseeing the bank's statutory activities. Bank
management is distinguished by the special object of management-financial relations related to banking
activities and other relations related to the execution of management functions in banking. In general,
bank management refers to managing the bank’s statutory activity. Bank management is characterized
by the specific object of management- financial relations connected with banking activities and other
relations, also connected with implementing management functions in banking.

A bank manager’s roles and responsibilities are usually the smooth functioning of a branch
office, guiding customers and employees and the branch success. Bank managers are well-versed with
various needs of branch operations and can guide the bank employees and customers in the daily
banking operations. The bank’s highest hierarchical authority is the Board of Directors. The Bank’s
General Management consist of General Manager and Deputy General Manager. The General
Management directly reports to the Board of Directors.

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

I. Banking Business:

Financial Intermediation Process

Bank engages in its primary function as a financial intermediary. Banks, in general, serve as intermediary

between parties who have excess funds and those who need it. This very important intervention as

performed by banks, and other FIs performing similar functions, allows the systematic flow of funds to

be channeled to productive use for the benefit of the economy.

Banks, through the intermediation process, encourage people to save and plan for their future and

provide them with earnings from their savings. At the same time, banks provide the economy, through

sound and carefully implemented credit policies, with funds to finance business activities and fuel

economic growth. Sound risk management policies dictate that banks strike a healthy balance between

these two critical functions of drawing funds from savers (deposit-taking activities) and providing the

same funds to those who have need of these funds (lending activities).

Banks may also engage in other activities outside traditional banking services. Some of these other

services include playing the role of fiduciaries for individuals and entities who need more specific

investment activities; providing advisory services, and cross-selling of financial products of subsidiaries

or affiliate entities. For these additional activities, special licenses or authorities must be obtained from

the FSS through specialized departments, which require, among things that they submit documentary

requirements to support their application and convince the Bangko Sentral that they have the capacity

to undertake these additional activities for the public.

II. Business of Banking:

Subsection 3.1 of R.A. No. 8791 (The General Banking Act of 2000)

- states that “Banks shall refer to entities engaged in the lending of funds obtained in the form
of deposits”. The definition of a bank varies from country to country. Under English common
law, a banker is defined as a person who carries on the business of banking, which is
specified as:

• conducting current accounts for his customers

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

• paying cheques drawn on him, and

• collecting cheques for his customers.

Business model

A bank can generate revenue in a variety of different ways including interest, transaction fees
and financial advice. The main method is via charging interest on the capital it lends out to customers.
The bank profits from the differential between the level of interest it pays for deposits and other sources
of funds, and the level of interest it charges in its lending activities. Fundamentally, the business model
of a bank is simple: it is about granting credit and collecting deposits. While banks may look very similar
to the public (or to their non-bank competitors).

III. Types of Banks

Subsection 3.2 of R.A. No. 8791 (The General Banking Act of 2000) states that –

“Banks shall be classified into:

a) Universal banks;

b) Commercial banks;

c) Thrift banks, composed of (i) Savings and mortgage banks, (ii) Stock savings and loan associations, and

(iii) Private development banks, as defined in the Republic Act No. 7906 (hereafter the “Thrift Banks

Act”)

d) Rural banks, as defined in Republic Act No. 7353 (hereafter the ‘’Rural Banks Act’’)

e) Cooperative banks, as defined in Republic Act No 6939 (hereafter the ‘’Cooperative Code’’

f) Islamic banks as defined in Republic Act No. 6848, otherwise known as the “Charter of Al Amanah

Islamic Investment Bank of the Philippines”; and

g) other classifications of banks as determined by the Monetary Board of the Bangko Sentral ng

Pilipinas. (6-Aa).

Universal and commercial banks represent the largest single group, resource-wise, of financial

institutions in the country. They offer the widest variety of banking services among financial institutions.

In addition to the function of an ordinary commercial bank, universal banks are also authorized to

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

engage in underwriting and other functions of investment houses and to invest in equities of non-allied

undertakings.

The thrift banking system is composed of savings and mortgage banks, private development

banks, stock savings and loan associations, and microfinance thrift banks. Thrift banks are engaged in

accumulating the savings of depositors and investing them. They also provide short-term working capital

and medium- and long-term financing to businesses engaged in agriculture, services, industry, and

housing, and diversified financial and allied services, and to their chosen markets and constituencies,

especially small- and medium- enterprises and individuals

Rural and Cooperative banks are the more popular type of banks in rural communities. Their

role is to promote and expand the rural economy in an orderly and effective manner by providing the

people in the rural communities with basic financial services. Rural and cooperative banks help farmers

through the stages of production, from buying seedlings to marketing their produce. Rural banks and

cooperative banks are differentiated from each other by ownership. While rural banks are privately

owned and managed, cooperative banks.

Top 5 Example of Banks in the Philippines per category

Universal Banks • Bank of the Philippine Island

• Metropolitan Bank and Trust Company
• Philippine National Bank
• Banco De Oro – BDO Unibank
• Philippine Trust Company
Commercial Banks • BDO Unibank Inc.
• Metropolitan Bank and Trust Company
• Bank of the Philippine Island
• Land Bank of the Philippines
• Philippine National Bank
Thrift Banks • AllBank (A Thrift Bank), Inc.
• BPI Direct Banko
• Philippine Savings Bank
• Robinson’s Bank
• Eastwest Bank

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Rural Banks • BDO Network Bank

• East West Rural Bank
• Card Bank (A MF RB)
• SeaBank Philippines
• Guagua Rural Bank
Cooperative Banks • First Isabela Coop Bank (FicoBank)
• One Cooperative Bank
• Coop Bank of Cotabato
• Ilocos Consolidated Cooperative Bank
• Mindanao Consolidated Cooperative
Bank
Islamic Bank • Almanah Islamic Bank of the Philippines
• Maybank

CHAPTER 7

MODULE POST-ASSESMENT

DIRECTION: Carefully read the question and write the appropriate answer for each category.

1. What exactly is bank management, and why is it so important in sustaining a country's

economic stability?
2. Explain the Financial Intermediation in Banking Business.
3. Discuss the concept and idea of the Banking Business Model.
4. Give at least five different types of banks, with examples for each.
5. How does the Central Bank of the Philippines implement monetary policy and ensure
the success of our country's banking system?

___________________________END OF CHAPTER 7______________________________

Authored by: Prof Geric L. Baliao CIA, MBA.

 Authored by: Prof Geric L. Baliao CIA, MBA.

Authored by: Prof Geric L. Baliao CIA, MBA.